Board governance policies: Building a culture of transparency

How does your community view your nonprofit? Your organization’s governance likely plays a big role in its public perception. Strong governance, supported by a well-crafted board governance policy, is essential to every nonprofit’s accountability and reputation. By outlining fiduciary duties, ethical expectations and oversight responsibilities, a governance policy helps boards operate effectively while reducing the risk of conflicts and compliance issues. Here’s what your governance policy should include.

The beginning of your board governance policy should explain your organization’s purpose. You might state your mission and explain that board members are responsible for making decisions that support that mission. Also state that directors are committed to the highest ethical standards and are aware of their fiduciary duties under state law and obligations related to your nonprofit’s federal tax exemption. The next section in your policy should describe board member responsibilities and obligations, emphasizing that the board has the authority to oversee all organizational operations. This is a fitting place to differentiate between board and staff responsibilities. For instance, you might say that the board doesn’t directly manage your nonprofit’s day-to-day operations. However, it’s responsible for exercising reasonable and prudent oversight of executives, staffers and others who carry out daily operations. The policy should also advise board members that they may rely on executive- and staffer-provided information and reports they believe to be accurate. The same holds true for board members’ reliance on professional advisors, such as attorneys and CPAs.

The heart of your governance policy should explain board members’ core fiduciary duties, starting with the duty of care. This relates to board members exercising reasonable care in all decision-making. They should avoid excessive risk and act in good faith when performing their duties.

Duty of care implies reasonable inquiry. Your board must ask questions and demand information that allows them to make informed decisions. For example, not every board member must be a financial expert. But every board member should understand basic financial terminology, be able to read financial statements and recognize red flags of financial distress.

The other major duty is duty of loyalty. Board members, as stewards of public trust, must always act for the good of your organization. In other words, board members are required to exert their powers, not in their own interests or that of another person or entity, but in the best interests of your nonprofit and its charitable mission.

The duty-of-loyalty section of your policy should state that board members must fully comply with your organization’s code of ethics and conflict-of-interest policy. And it should require that board members refrain from taking advantage of business or personal opportunities that become known because of their position as directors of your organization.

Some organizations have governance committees. Such committees can, according to nonprofit BoardSource, be considered the “conscience of the board.” Their responsibilities usually include:

• The review and updating of governance policies,
• Oversight of board compliance with such policies as your nonprofit’s bylaws, conflict-of-interest rules and code of ethics,
• Recruitment of new board members, and
• Engagement of current board members.

A governance committee can operate effectively without a formal policy as long as it’s able to coordinate the board’s manner of governing.

With a strong governance policy, you can build a culture of transparency and ethical leadership that’s apparent to stakeholders inside and outside your organization. Clearly outline fiduciary duties and standards of conduct — and hold all board members accountable to them. Whether governance responsibilities are handled by your full board or a dedicated governance committee, be sure to review and update policies to accommodate the rapidly evolving regulatory and financial environment of nonprofits. Consult legal and accounting experts for the latest information.